Sebi to revise rules to reinstate discretionary power on penalties

The Securities and Exchange Board of India will start to determine penalty amount keeping a company's net worth in context

Jayshree P. Upadhyay, Anirudh Laskar
Updated29 Mar 2016
Photo: Aniruddha Chowdhury/Mint<br />
Photo: Aniruddha Chowdhury/Mint

Mumbai: India’s capital market regulator may soon frame rules allowing it to levy monetary penalties for rule violations in proportion to the net worth of companies that, in the past, have been slapped with large fines they couldn’t afford to pay.

The Securities and Exchange Board of India (Sebi) will not revise the lower and upper limit prescribed for various misdemeanours, but will start to determine the penalty amount keeping a company’s net worth in context, said two people familiar with the development.

The penalty starts from 1 lakh a day. It can go up to 25 crore, or three times the gains made by the defaulter through rule violations, whichever is higher.

The re-look comes after the Supreme Court in November upheld a 1 crore penalty imposed on Roofit Industries Ltd by Sebi that had been revised lower by the Securities Appellate Tribunal (SAT).

Upholding the original penalty imposed by Sebi, the court said the existing framework didn’t allow the regulator any discretionary power in deciding on the amount of penalty levied within the prescribed band.

Since the court didn’t specify that its ruling was applicable prospectively, Sebi has been forced to go slow while passing penalty orders even as it works on revising the norms.

Sebi is discussing the matter with representatives of the law ministry and the finance ministry and looking at ways to amend part of the Sebi Act which deal with the imposition of penalties, said the two people cited above, requesting anonymity. An e-mail sent to Sebi did not elicit a response.

According to Vaneesa Agrawal, a securities lawyer and ex-Sebi official, Sebi should have the ability to consider other factors while imposing penalties.

“Almost a decade back, this question of discretion of Sebi’s adjudicating officer was before a committee headed by (former) chief justice of India M.H. Kania. They had recommended that section 15 J includes reading of additional factors such as the conduct of the persons during the inspection or investigation; the seriousness of the violation; and the effect of violations on securities market,” said Agrawal.

The apex court has now held that the newly amended Sebi Act, in terms of adjudication of penalties, is “very clear” and there is no need for Sebi to use discretionary powers in levying penalties. In January, Sebi filed a review petition at the apex court seeking the reinstatement of discretionary powers in cases dating back to days before August 2014, when the amendments to the Sebi Act were passed.

Meantime, Sebi is considering the introduction of an “impecuniosity” clause to ensure that all penalties levied by it are commensurate with the nature of default and the net worth of the defaulter. In legal parlance, the word impecuniosity means the ability to pay.

If introduced, Sebi’s adjudication office will be able to trigger the impecuniosity clause if a company or an entity does not have enough money or resources to pay the fine. This will also enable the regulator to justify a fine lower than the amount that would be levied on a financially sound entity.

This norm, if implemented, will ensure that Sebi’s penalty orders are not futile and the defaulter is not set free without any charges, said one of the two persons quoted above.

“... it is necessary that net worth of noticee, impecuniosity or capacity to pay, percentage of shareholding or voting rights and bona fide act should be included by Supreme Court larger bench or by way of an amendment. These factors will guide Sebi as well as SAT in reducing penalties in appropriate cases and would lay (down) the law,” Agrawal added.

Following the Supreme Court verdict on Roofit, Sebi has levied huge penalties in several cases as it held back on its discretionary powers. For instance, Sebi imposed a total penalty of 3 crore on Presha Metallurgical Ltd for failing to make timely disclosures. Then, a fine of 2 crore was levied on Sunciti Financial Services for failing to make timely disclosures to stock exchanges with regard to change in shareholding.

As per data available with the ministry of corporate affairs, Sunciti Financial Services has paid-up capital of 18.9 lakh. Presha Metallurgical Ltd has cash and cash equivalent of 22 lakh as per the company’s annual report for the period 2013-14.

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